The Motley Fool's readers have spoken, and I have heeded their cries. After months of pointing out CEO gaffes and faux pas, I've decided to make it a weekly tradition to also point out corporate leaders who are putting the interests of shareholders and the public first, and are generally deserving of praise from investors. For reference, here's my previous selection.
This week, I'll turn your attention to the recently beaten-down fertilizer sector and I'll show you why I believe Mosaic (NYSE:MOS) CEO James Prokopanko is truly an incredible leader.
The fertilizer hits the fan
It may not be easy to see the good in the fertilizer sector these days, but if you look hard enough it's there. Just two weeks, ago Russia's Uralkali, the world's largest producer of potash (a type of fertilizer), said it will end its cooperation in a potash price-fixing cartel and sell its production on the open market. Speculation from Wall Street analysts was that potash prices could fall by 25% or more simply because of a market glut of potash.
The news boded poorly throughout the entire sector. The smaller Intrepid Potash (NYSE:IPI) was absolutely crushed, given that its second-quarter results, reported just one day after the Uralkali announcement, show that it derived 84.4% of its gross sales from potash, with the remaining sales coming from its langbeinite production. With less working capital and fewer available resources, Intrepid Potash is really just along for the ride.
If you think size matters, a spot price drop in potash prices will indiscriminately harm margins. PotashCorp (NYSE:POT) has seen the investment grade of its bonds fall further in wake of the Uralkali announcement, falling to BBB-, according to ratings agency Standard & Poor's. That's just one notch above speculative grade and could signal trouble ahead for the company if potash spot prices really dip.
Production is another concern. Despite the news that Uralkali is going to flood the market with production, Agrium (NYSE:AGU) has showed no intention of slowing the expansion of its own potash production. Although two separate industries, this has all the similarities of Chinese solar manufacturing in that production keeps expanding regardless of what happens to margins.
Finally, there's a lot of consumer animosity against fertilizer companies thanks to studies that demonstrate the potential dangers of genetically modified organisms over the long run. Monsanto (NYSE:MON) has been a big proponent of using genetically modified seeds to increase crop yield, and its backlash has been spreading throughout much of the fertilizer sector.
Kudos to you, Mr. Prokopanko
In spite of this cluster of bad news, Prokopanko has, since 2007, led Mosaic and its investors to incredible success.
Fiscal 2013 was a big challenge for Mosaic, with average potash and phosphate prices falling and the planting season for farmers being constrained by unfavorable weather patterns. While there isn't much Mosaic can do about the weather, it can alter its production and drastically reduce its costs in an effort to improve its bottom line. This is why I find the fact that although full-year revenue fell from $11.1 billion to $10 billion last year, it still earned exactly the same amount ($4.42 per share) that it earned in fiscal 2012. Year-over-year growth may have been flat, but this is the type of margin improvement worth cheering when you realize that demand for higher crop yields is only going to increase globally as population count increases.
An often overlooked factor that keeps Mosaic successful is the fact that phosphates, not potash, account for the majority of its revenue ($1.7 billion of $2.7 billion in the fourth-quarter). Although phosphate margins aren't nearly as high as that of potash, they are also much more stable. This is primarily why companies like Intrepid Potash have been squashed and why Mosaic could be an incredible bargain after the Uralkali announcement.
A step above his peers
Beyond just the financial outperformance of its peers, Prokopanko has done a fantastic job of rewarding shareholders, taking care of Mosaic's own employees, and in giving back to the community.
Before 2011, Mosaic had never paid shareholders a dividend, nor had it been a particularly big advocate of share repurchase programs. That, however, has changed in a big way over the past two years. Earlier this year Mosaic noted its intention of enacting a share repurchase program, perhaps as large as $2 billion, in the latter half of this year. As a reminder, share buybacks don't put cash directly in shareholders' pockets, but they do have the effect of making a company appear cheaper on a P/E basis with fewer shares outstanding.
The big surprise has come in the dividend department, with Mosaic paying out its first quarterly dividend ever of $0.05 in August 2011. However, following just four quarters of paying dividends, it boosted its payout twice and now divvies out $0.25 per quarter, or quintuple what it was paying out just two short years ago for a current yield of 2.4%!
Working for one of the world's largest crop nutrient companies also has its perks if you're an employee. As you might expect, there are standard benefits like educational reimbursement and long-term disability. What's unique about Mosaic are some of the optional benefits, which can include health, dental, and vision insurance that would extend to a spouse or a domestic partner, an employee bonus and profit-sharing plan, and the fact that many of its locations have onsite fitness centers.
Mosaic is also doing its best to give back to the world that makes it so profitable. In 2012 Mosaic and its many global subsidiaries made a combined contribution of $23.6 million to support food, water, and local community investment programs. More recently, Mosaic donated $10,000 to 12 separate food banks in Florida for a grand total of $120,000, to demonstrate its ongoing commitment to reduce hunger domestically and abroad.
Two thumbs up
On paper, fertilizer companies make a lot of sense, given that the demand for food and higher crop yields is only going to increase as the population rises. In practice, though, the weather and supply issues can create havoc from time to time. With a well-diversified lineup of phosphate and potash fertilizer, a boatload of cash, and a dividend that's grown by 500% in just two years, I see no reason Mosaic can't succeed and why we shouldn't be giving CEO James Prokopanko a good degree of credit for that success. He certainly deserves two thumbs up in my book!